DFS Furniture plc

Good morning, everyone, and welcome to the DFS Group 2026 Interim Results presentation. I'm Tim Stacey, Group CEO, and I'm here with Marie Wall, our Interim CFO, and together we will update you on our first-half performance, provide a strategic update, and also a future outlook. Now, there are three key themes that we'll bring out in the presentation today. Firstly, on the financials, Marie will talk to the good result we've achieved in half one and also update you on our FY26 outlook. Second, I'll talk about how we've delivered on our strategy, which has supported our improved performance and delivered on our plan to reduce our debt. And third, in terms of future growth, I see significant growth potential for the business across the medium term. That's revenue and profit growth, which will deliver high levels of free cash flow. So onto our half one performance. In what remains a broadly flat upholstery market, we grew group order intake by 2.3% year on year with both of our retail brands in growth. Gross margin progression continued up 110 basis points year on year, marking our fourth consecutive year of improvement. Combined with discipline cost control, this delivered a significant uplift in profitability. Underlying PBT increased to 31 million, up nearly 14 million year-on-year, demonstrating the operational gearing in our business model. And we achieved the 5% PBT margin we've been targeting outwith any market recovery. Importantly, we also strengthened the balance sheet. Strong cash generation enabled substantial debt reduction, bringing leverage down to 0.8 times, now just within our target range of 0.5 to one times. This enhanced financial flexibility positions us very well for future growth and also allows us to reintroduce a dividend, which Marie will talk to later in the presentation. Looking ahead, we see significant growth potential over the medium term. Our vertically integrated platform, exclusive brand partnerships, scale advantages and logistics capabilities give us confidence in our ability to grow profit. And with a revenue to profit drop through of around 40%, the business is well positioned to benefit from any future recovery in consumer confidence and market demand. We therefore remain confident in delivering our medium term targets of 1.4 billion of revenue and 8% PBT margin. In summary, we've been focused on executing our strategy. We've delivered profit growth, reduced leverage into our target range, and positioned the group strongly for the future, despite what's clearly a challenging external backdrop. Just briefly, turning to some key highlights for the first half. First, our non-upholstery home offer continues to build real momentum. Increased marketing, expanded product ranges and selective showroom investments are driving customer engagement and conversion, leading to a 14% year-on-year order intake growth. Secondly, exclusive brand participation reached 42% of DFS's sales mix. This is an important strategic lever for the group, strengthening our differentiation and enhancing our customer proposition with ranges that customers can't find elsewhere. And finally, our approach to customer satisfaction remains a core differentiator. Our DFS established customer net promoter scores improved by 10 percentage points to record levels. This reflects the hard work of our colleagues across the group and the continued focus on product and service quality across the end-to-end customer journey. And I'd just like to thank all of our colleagues for their incredible work in the half. Look, in summary, we've accelerated growth in home, we've leveraged our exclusive brands further, and we've increased our customer satisfaction to record levels. I'll now hand over to Marie, who will take you through the financials for the first half.

Hi, thank you, Tim, and good morning, everyone. It's a pleasure to be here today. I'm going to begin by walking you through our key financial headlines. We achieved strong revenue growth of 8.6% year on year, and this was delivered through a combination of order intake growth over the half and a larger opening order bank coming into the year, which drove a higher level of deliveries in the first quarter. Underlying profit before tax and brand amortization increased by 13.9 million to 30.9 million. And our underlying basic earnings per share increased by 4.5 pence or 85% to 9.8 pence. The strong profit performance is the result of higher revenues supported by 110 basis points of gross margin expansion and lower interest charges resulting from disciplined cash management and lower levels of bank debt. We continued to reduce our absolute debt levels to build balance sheet resilience, and ended the period with net bank debt of 60.6 million, down 56.1 million year on year, and down by 104 million since full year 24. This was achieved through the improved profit performance, the successful execution of our cost programme and our disciplined approach to cash management. I am pleased that our leverage position has continued to improve and with our reported leverage now at 0.8 times, that's one times after adjusting for the phasing of working capital. This is just at the top of our target leverage range of 0.5x to 1x and marks a significant improvement on one year ago. In summary, the Group's performance in the first half of FY26 built on the momentum we achieved in FY25 and marked another strong period of profit growth, free cash flow generation and, importantly, substantial deleverage. So moving on to our sales performance and starting with order intake. Following a slower than envisaged start to the period due to exceptionally hot weather in July and August, order intake performance strengthened over our first half. For the period as a whole, the group achieved 2.3% year-on-year order intake growth in a market that was broadly flat year-on-year. Both our retail brands grew their order intake in the period, reflecting the success of our commercial initiatives in driving volume growth in both brands. In DFS, exclusive brands continue to perform strongly and reach record levels. In addition, sofas with a high number of technology components, such as wireless chargers, wine fridges, our patented heated seats and our sound systems, help contribute to higher average order values. As Tim mentioned, our home non-upholstery category also performed strongly in the period, up 14% year on year. This benefited from the recent marketing investment and the rollout of some of our exclusive upholstery brand partnerships into our home ranges. Overall, DFS achieved order intake growth of 2%. In Sophology, the range and price changes made in the previous year, along with our continued focus on range optimisation, has meant the proposition continues to resonate well with the consumer, and this underpinned higher conversion rates, driving the brand's 3.4% year-on-year order intake growth. Gross sales, which are reported on the delivery of customer orders, increased 8.7% year on year. This is higher than the reported order intake growth of 2.3%. Now, as I mentioned earlier, this is due to the elevated opening order bank relative to the bank that we entered the year with in the previous year. Revenue, which is at the bottom of the table, is reported after deducting VAT, the cost of providing warranty products, and interest-free credit. It grew at a similar rate to gross sales, with the cost benefit from Sonja rate reductions reinvested into strengthening the commercial proposition. So in summary, we achieved a strong top-line performance in a subdued market through our ongoing focus on improving our market-leading proposition. Moving on to gross margin. Following three consecutive years of gross margin rate improvement, the group delivered a further 110 basis points of gross margin expansion in the half, making strong progress towards our 58% margin goal, supported by improved product margins, stronger US dollar GBP exchange rates, and a return towards historic average levels on freight rates and Sonia rates. In absolute terms, gross profit increased 30 million year on year to 316.3 million. So running from left to right on the chart and taking each building block in turn, the strong revenue performance translated into an incremental 24 million of gross margin in the half. Product margins increased 30 basis points, or 1.4 million, through a number of initiatives which we initially kicked off under our Cost to Operate programme. Now these include redistributing products across our supplier base to optimise cost of goods and quality, ongoing product re-engineering and reviewing opportunities to better leverage the group scale. The latter has been enabled by bringing together commercial buying teams of each brand under one leader. Freight rates gradually reduced through the first half, returning back towards longer term historic average levels by the end of the period. This drove a 2.7 million or a 50 basis point year on year rate improvement, which was ahead of our initial expectations. It is also worth noting that every $1,000 movement in freight rate per container impacts our annual freight costs by around seven to eight million a year. And finally, foreign exchange. We benefited from improved US dollar rates applied to our Far East products, and you'll recall that every one cent movement equates to just over a million pounds of annualised cost impact. The average rate paid through the period was 3 cents favourable year on year, resulting in a 1.9 million or 30 basis point rate benefit. Now this was in line with our expectations. So in summary, another strong period of gross margin progression and we have made good progress towards our stated 58% target. So let's take a moment to look at operating costs. I'd like to start by reminding you of the target we set at the end of FY23, which was to deliver 50 million of annualised cost savings by the end of FY26. As you may recall, by the end of FY25, we had delivered 53 million against this target, which was one full year ahead of our plan. That early delivery has reset our cost base and demonstrated the strength of our cost discipline. Importantly, those savings are now embedded in the business and are building and helping to offset inflationary pressures broadly as we expected. Against that structurally leaner cost base, our operating costs, including depreciation and interest charges, increased 16 million year on year to 285.4 million. Now, this increase is largely explained by three factors. Firstly, volume-related costs increased 6 million, linked to the higher sales achieved in the period. Secondly, inflation added a further 6 million, or around 2%. And this was primarily driven by wage increases and the impact of the April 2025 national insurance changes. And finally, we invested 7.4 million in marketing to drive awareness of our home proposition, as well as returning Sophology to TV advertising with the launch of its new So Fussy campaign. And this is resonating really well with our consumer base. Initiatives launched last year through our Cost to Operate programme have continued to provide savings in the current year, helping to partially mitigate cost inflation. For example, In our customer service operations, we are transitioning to service both retail brands through one group function, enabling us to leverage standardised processes and using two new technology to drive efficiency and improve the customer experience. Debt interest and depreciation charges fell by 3.4 million year on year, And the majority of this, or around 2.5 million of the reduction, relates to interest savings, resulting both from the high levels of free cash flow generation over the last year, which reduced absolute debt levels, and, to a lesser extent, from a lower average funding cost. In addition, the group has taken a very disciplined approach to capital investment over the last three years, with absolute levels of investment being lower than historical levels, and this has driven a lower depreciation charge in the half. So looking forward to the second half, we do not expect the year-on-year operating cost increases to be as significant as in the first half, as we cycle the inflationary headwinds experienced in Q4 last year and we annualise the marketing investment increases we made. We are mindful of the potential impact of the conflict in the Middle East and expect our exposure to higher levels of inflation to be limited in FY26 and this is because we are hedged across energy costs and our shipping agreements. Now this is something that we are obviously keeping a close eye on and we will seek to minimise any potential longer term impacts as we have done before. Turning to cash flow and debt. Building on a strong cash performance in FY25, the group again generated a high level of free cash flow in the first half. In this period, 46.4 million of free cash flow was generated. We have maintained capital expenditure at relatively low levels compared to long-term average levels for the group as we focused on debt reduction, limiting growth investment to capital light and short payback growth projects. As our financial position has improved, in Halfhorn FY26 we also invested in some additional growth opportunities. Now these include a new Sophology showroom in Carlisle and a mezzanine investment in DFS's Stockton showroom to expand the upholstery ranges on display and create dedicated space for expanding our home offer. We continue to invest in data, AI and technology to both enhance the customer experience across the buying journey and to improve the quality and efficiency of our supporting operations. We expect capital investment for the full year to be in the range of 24 to 28 million as previously guided. Interest costs were lower year on year due to the lower average net bank debt levels through the period and to a lesser extent benefiting from a lower average cost of financing resulting from Sonia rate reductions and a lower leverage premium on our RCF facility. Corporation tax payments were higher year on year, and this is due to the benefit in half one full year 25 of recovering historical overpayments. Lease payments were also 7.3 million lower year on year, reflecting a timing difference on rent payments, which will reverse as we go into the second half. Working capital inflows in the period totaled 17.7 million. This inflow is driven by seasonal flows associated with the large volume of guaranteed for Christmas orders. And this is quite typical. Following typical trends, we would expect this to unwind by the year end. It is worth noting that the working capital inflow was higher in the first half of FY25 and this was driven by a large increase in the level of customer deposits held following the significant improvement we saw in trading performance towards the end of the first half last year. So turning to debt levels. Over the last 18 months we have focused on building a stronger and more resilient balance sheet. and we have reduced absolute debt levels by £104 million to £60.6 million at the end of half one. This debt reduction has been achieved through the improved profit performance, working capital inflows resulting from the improved trading and our disciplined approach to cash management. Pleasingly, bank leverage is now at 0.8 times or one times after adjusting for working capital phasing. And this means that we are now at the top of our target 0.5 to 1 times leverage range, making good progress towards our plan to operate within and towards the lower end of the range. I'll talk to you about capital allocation shortly. So I'm now going to take you briefly through how we see the macro outlook to provide a little bit of context before I discuss the outlook for this financial year and dividends. Overall, the key market drivers applicable to our sector remain broadly stable. Starting with consumer confidence on the left-hand side of the chart, we know there's a strong correlation between consumer confidence and market demand for upholstered furniture. The appetite for major purchases has been relatively steady over the last 12 months. However, they remain below pre-pandemic levels and confidence is not yet at a level that would support a meaningful step up in discretionary spend. Of course, the recent events in the Middle East are not reflected in this data set and we're also mindful that unemployment has edged upwards towards 5.2% towards the end of the calendar year. This may further weigh on sentiment in the near term. Moving to the middle chart, real household disposable income is growing and forecast to continue to grow, but at a slower pace than we have seen in previous OBR forecasts. Consumer balance sheets are stronger and savings rates remain above pre-pandemic averages. The key point here is that income growth is not yet fully translating into spending growth, particularly in big ticket categories like ours. So finally, on the right-hand side, property transactions. Transactions typically drive around 20% of upholstery purchases, and as you can see from the chart, these have been relatively volatile in recent months given the uncertain macro environment. Whilst the growth rate has slowed recently, it's largely been in positive year-on-year territory for almost two years now. So in summary, whilst the structural drivers are broadly stable, they are not signalling a near-term inflection point and the potential consequences of what is happening in the Middle East are hard to determine as I stand here today. So we continue to plan on the basis of a relatively flat and subdued market backdrop and we're focusing on what we can uniquely control. So bringing that together for the outlook for this year, Since the half year, we have seen some softening of football trends, linked firstly to adverse weather conditions over the period, and we are aware that consumer confidence remains really delicately balanced. We will remain focused on executing our strategy, and in combination with our disciplined approach to gross margin and cost management, we are comfortable with reiterating our uplifted profit guidance in the range of 43 to 50 million. Now, that does, of course, assume no material supply-driven disruption, which could impact the delivery of customer orders in the full year, resulting from the current geopolitical events. And from the cash flow perspective, as I mentioned earlier, we don't expect to see a reversal of the half one working capital inflow as a result of typical seasonal trends, and the rent timing benefit we had in half one will also reverse in half two. Our full year cash capex is as previously guided at 24 to 28 million and that includes some further growth related investments in our second half. Looking forward, our capital allocation priorities remain unchanged. We continue to focus on improving balance sheet resilience, reducing debt down to operate at the bottom of our target range of 0.5 times and to invest to maintain the group's asset base and support future growth. and importantly to provide sustainable shareholder returns. So as Tim alluded to earlier, in light of our improved position and reiterated guidance for the full year, the board has approved the payment of an interim dividend of one pence per share. In determining the appropriate size of the dividend, we took into account that demand drivers remain delicately balanced and that the group is not immune to geopolitical events and their potential impact on the macro environment. We believe that returning to the dividend register in a measured way is the right course of action to balance investment and growth, continually leveraging towards the lower end of our target range and support sustainable shareholder returns. And with that, I will now hand back over to Tim.

All right, thanks, Marie. I'd like to take a step back and focus on the reasons why we've delivered this performance in the first half. Now, we have been focused relentlessly on executing our strategy and controlling the things that we can control, carrying forward the momentum we had from the last financial year. And the financial outcome reflects the progress we've made in three key areas, which are leveraging our scale and vertical integration, utilizing data and technology, and harnessing our unique people and culture to drive performance. Now, these three enablers are increasingly interconnected, and I'll take you through each one of them now. In terms of leveraging our scale, now scale is a fundamental competitive advantage for our group. We're the clear market leader with around 39% value share of the upholstery market and we operate at a scale that is unmatched in UK upholstery. This leadership gives us structural advantages and it's difficult to replicate. It enables us to secure exclusive brand partnerships, maintain strong relationships with our supplier partners, and operate highly efficient shared functions across design, manufacture, retail, logistics, and servicing. In DFS, exclusive brands remain central to our proposition, now representing over 42% of our sales mix. Our collaborations with brands such as French Connection, Joules, Ted Baker, and Country Living allow us to create differentiated ranges that customers can't find elsewhere. More recently, we've enhanced our ranges with technology-led innovation. Our Cinesound range and Soundwave by my good friend Shaquille O'Neal bring Bluetooth connectivity, immersive sound, and integrated features directly into the sofas. We've also recently launched a super exciting collaboration with Amanda Holden, bringing bold statement designs to our customers' homes. And as you can see here on the far right-hand side of the slide. In Sophology, the new SoFussy campaign featured Craig Revel Hallward, which has resonated strongly with customers. We've also launched new Lazy Boy ranges into Sophology, the Atlanta and Colorado, carefully selected to complement the existing offer and drive incremental growth. In addition, Sophology's post-Christmas sale successfully drove strong order intake growth. Our scale also extends into our home offer. Partnerships with House Beautiful and Ted Baker, alongside our in-house brands, supported 14% growth in home order intake, as I mentioned earlier. In addition, mezzanine expansions are enhancing the showroom footprint for home, together with marketing driving awareness. In terms of vertical integration, our vertically integrated model gives us end-to-end control from design and sourcing through to logistics and final mile delivery and customer service. This end-to-end control drives several benefits. Firstly, design led value creation. We control product development, which means we can engineer margin and cost discipline and quality into the product ranges from the outset. Secondly, Our in-house creative engine allows us to produce marketing assets faster and more cost-effectively, improving speed to market and reducing external spend. Next, as the largest sofa manufacturer in the UK, and also through the Sofa Delivery Company, operating as the UK's leading two-person sofa delivery service, we can provide quality, consistency and cost leverage, and this underpins our strong Net Promoter Score performance. I'm pleased to be able to say that the sofa delivery company has now signed contracts with two third-party retailers. This creates incremental revenue, utilising the spare capacity within our existing logistics infrastructure. And lastly, across customer service, consolidating specialist teams while retaining separate brand identities has enabled us to leverage expertise, improve consistency and drive efficiencies. Moving on to data and technology, they're clearly increasingly central as to how we differentiate and drive efficiency across our group. We're building capability within our proprietary platforms to enhance both the customer experience and our operational performance. And we're also embedding technology directly into our product ranges, whether that's the integrated sound systems, wireless charging, enhancing functionality, creating clear points of differentiation and supporting higher average order values. We're also using AI to tailor the online journey. New customers to our websites will see more inspirational, research-led content, while returning customers are shown previously viewed products and relevant recommendations. This is improving engagement and conversion while strengthening brand perception. We've also further developed our websites to provide our customers with a more brand-enhancing omnichannel experience. For example, in Sophology, tools such as the showroom range locator and complete at-home functionality are enhancing flexibility and driving conversion. Interest-free credit remains a core part of the upholstery market, and we've introduced a new soft-search online credit checker, which allows customers to assess their eligibility from the comfort of their own home before visiting a showroom. This improves their confidence, it reduces friction in the buying journey, and drives efficiency for our sales colleagues in store. Finally, AI now supports written communications, intelligent call routing, and call analysis in our customer service function. This results in faster resolutions, improved service quality, and better targeted colleague training. Now taken together, these initiatives are driving higher e-commerce MPS, improving productivity, and enabling us to offer a truly channel agnostic customer experience. So onto our culture and our people. Our culture underpins everything we do. And we've worked really hard in recent years to integrate group functions while preserving the distinct retail branded identities. That cultural evolution continues to unlock collaboration and performance and team spirit. Our leadership development programme has played a central role in shaping our enhanced group employee value proposition and this is launchers in half two this year. Our next leadership cohort is already underway. Inclusion remains a priority. With the launch of the new Mankind Network, we now have seven colleague networks, each sponsored by senior leadership, and that supports diversity, well-being and innovation across the group. Sustainability is also embedded deep within our culture, and we are progressing our property decarbonisation agenda to meet our SBTI target of a 54.6% reduction in Scope 1 and 2 emissions by 2032. Now this slide kind of brings it all together in terms of the financial outcomes of our strategy execution in the first half, and it's a pretty simple equation. Top line growth combined with structural gross margin improvement and a leaner cost base is translating into meaningful profit progression. And this is demonstrating the operational leverage within our business model. It gives us confidence in not only the resilience of our business today, but also the earnings potential in the future no matter what the macro brings. Looking further ahead, earlier in the presentation, Marie provided some context around the market drivers being fairly subdued. But what I want to do now is to take you through what we can control. And we see three clear medium-term opportunities to deliver sustainable profit growth out with market recovery. Firstly, in our core upholstery business. We continue to focus relentlessly on new product innovation, investing in technology-enabled products, exclusive brands, etc. We'll also invest in our showroom space through new showrooms and refits. At the same time, we're operating with a structurally improved cost base, and our vertically integrated operating model allows us to capture value across the entire supply chain. Our core upholstery business is leaner, more efficient and well positioned to translate any incremental sales into high profit conversion. Secondly, the home market opportunity. Beyond core upholstery, we see a significant opportunity in the broader home market. The total addressable market here is 5 billion. And we are initially focusing on 3 billion beds and mattress segment and are leveraging our exclusive brand partnerships, creating new products. We've increased our marketing investment. We're expanding our showroom space through mezzanines and DFS and extending ranges online to drive growth. This is a natural adjacency for us, and using our existing infrastructure and the DFS brand strength in all of our assets, we remain very confident in delivering 100 million of incremental revenue over the medium term. Finally, leveraging our platforms. Now, the Sofa Delivery Company is a unique and scalable asset within our group. It already supports brilliantly our retail brands with market-leading customer service levels. Now we are increasingly utilising spare capacity within our model to secure third-party contracts. This creates a capital-light, scalable earnings stream, generating incremental revenue and profit through third-party opportunities without significant additional investment. And underpinning all of this is what happens in terms of the upholstery market recovery, which is still over 20% below pre-pandemic levels. Once that recovery comes, that will provide an additional tailwind, but we're not waiting for that. There's things that we can control. Now, given our structurally improved gross margins, our operational leverage, and 40% drop through, any improvement in demand will translate into meaningful profit and cash growth. So just to summarise, we have three clear medium-term opportunities under our control. Growing our core upholstery, growing our home market and leveraging our platforms. And that's in addition to any market recovery. This gives us a lot of confidence in the future, progressing from around a 5% PBT margin today to an 8% PBT margin in the medium term. So in summary and standing back, in half one, we're really pleased with half one's performance. We achieved good order intake growth on the back of a really strong comparative last year, growth across both retail brands, improving our gross margins for the fourth consecutive year, generated strong cash flow with over 100 million over the last 18 months, reducing our leverage back into our target range. We're now operating from a position of real increased financial strength. And of course the market remains subdued and the macro is uncertain. But we have multiple levers in our control from continued self-help and lots of experience of dealing with previous crisis. We know how to manage this business. We can improve our upholstery proposition and grow there. We've got a great opportunity in the home market and we can leverage some of the platforms that we've been building over the last few years. And over the medium term, as the core upholstery market recovers, we are structurally better positioned than ever before to convert that revenue into high levels of profit and cash growth. So we therefore remain confident in delivering our full year guidance and also achieving our medium term targets of 1.4 billion of revenue and 8% PVT margin. Now, before I close, I'd just like to thank Marie for her outstanding contribution as the Interim Chief Financial Officer. She's provided strong leadership, stability, great support through this important phase for our group. I'm incredibly grateful for your support. Thank you. We also very much look forward, I know she's watching, to welcoming Dominique Highfield as our new Chief Financial Officer in May. And Dominique joins us at a very exciting and challenging time. And I'm sure she'll play a key role as we continue to strengthen our business and deliver on our medium term ambitions. Last but by no means least, I'd like to thank every single one of our colleagues for their relentless dedication and focus on customers and looking after each other. the culture we've created in this business, the resilience we have and the spirit we have will see us through whatever. So big thank you. That concludes our presentation. And I'll now invite Marie back up so we can handle any Q&A.